At McGraw-Hill, an Heir Takes Over and the Company Flourishes

By GERALDINE FABRIKANT

Published: June 27, 2005

When Harold Whittlesey McGraw III joined McGraw-Hill in 1980, there were plenty of skeptics -- despite the fact that his name was on the building.

Even after a decade at McGraw-Hill, the company his great-grandfather founded and started to build into an empire, many thought Mr. McGraw, who is known as Terry, was yet another heir who had lucked into a job he could not handle. Some went so far as to call him ''our Dan Quayle.''

Not exactly.

In the 12 years since Mr. McGraw took over as president and chief executive officer of the McGraw-Hill Companies, the parent of Standard & Poor's, BusinessWeek magazine, trade publications and a leading educational publishing business, the company's stock has risen from $8.20 a share on Aug. 2, 1993, to $44 a share at Friday's close -- a 437 percent increase.

That return beats both the Dow Jones and S.&P. indexes, other educational publishers like Pearson and Reed Elsevier, as well as most newspaper publishers and an array of broader media conglomerates, including Time Warner, the Walt Disney Company, Viacom and the News Corporation. In that broad group, there are a number of chief executives who have generated a lot more headlines than Mr. McGraw has. Only Moody's, a competitor of Standard & Poor's in the debt-rating market, has outperformed McGraw-Hill, with shares rising 266 percent since it went public in June 1998. In that period, McGraw-Hill shares have jumped 114 percent.

So how much of McGraw-Hill's good fortune is due to its prime assets and how much to Mr. McGraw's leadership?

McGraw-Hill, which posted 2004 net profit of $755.8 million on revenue of $5.3 billion, has scored big on its ownership of S.&P., the debt-rating company that has cashed in on the explosion in corporate debt offerings and the structured-finance markets. Today S.&P. accounts for 65 percent of the company's operating profits, compared with 45 percent a decade ago.

But even former skeptics give Mr. McGraw, who has been the company's chief executive since 1998 and its chairman since 1999, credit for streamlining McGraw-Hill from an agglomeration of 15 business units into three core businesses that have capitalized on major trends in the United States and abroad. S.&P. has benefited from the growth of capital markets here and abroad, and the educational publishing unit has profited from state governments' focus on education and the ''No Child Left Behind'' education law of 2001; McGraw-Hill did some lobbying for that law.

The information unit, led by BusinessWeek magazine, has sold off many of its unprofitable trade publications, like Chemical Engineering, and tried to focus on a narrower group of faster-growing trade areas like construction and energy. Recently, however, that sector has stumbled because of an advertising drought.

''What Terry has done very smartly is manage McGraw-Hill's portfolio, moving the company away from slower-growing low-return businesses toward faster-growing higher-return businesses, in an evolution of the asset mix,'' said Peter Appert, a media analyst at Goldman Sachs.

As Mr. McGraw sees it, his company's mission is to generate ''consistent, sustainable earnings growth.'' In an interview in his office on the 49th floor of the company's Manhattan headquarters, he said, ''One way to get there was to take the volatility out of the earnings cycle.''

Mr. McGraw, 56, started his career in pension fund management at GTE, the former telecommunications company. He can sometimes ramble on in conversations that range across myriad topics, creating the impression that he is a bit unfocused. But those who have long worked with him say he pays close attention to the details of the underlying businesses.

Changes at McGraw-Hill have come in incremental steps rather than the headline-grabbing acquisitions and Internet investments. Over the last 10 years, McGraw-Hill has not spent more than $1 billion on a purchase. Mr. McGraw ''was extremely disciplined in the way he built the company,'' said Stephen B. Shepard, former editor of BusinessWeek and now dean of the graduate school of journalism at the City University of New York. ''He deserves great credit for not going off the deep end in the boom years when so many other media companies did stupid things.''

Nor was McGraw-Hill tripped up in the race to the Internet, which was so disastrous for some companies.

''He did not get sucked into the malarkey we tried to push him to,'' said Lauren Rich Fine, who follows McGraw-Hill for Merrill Lynch. ''He has been the least intimidated by the Internet and the most willing to embrace it as an improved customer delivery channel. For instance, they were among the first to digitize their educational textbooks so that when McGraw-Hill was ready to deliver them online, it could.''

On a paper napkin, Mr. McGraw drew a small chart that explained his view of the Time Warner-AOL deal. ''See, Time Warner had assets and cash flow,'' Mr. McGraw said, creating one side of a ledger. On the other side: ''AOL had zero assets and zero cash flow. In the deal, Time Warner got sizzle. The AOL guys cashed out. They've gone off to the beach.''